Evaluating hospitals’ Form 990: A C suite-level review

 

A Form 990 reveals a lot about your hospital to your staff, prospective donors, board members, your competition, the public, and the media. The purpose of the form has always been to enable the IRS and the public to evaluate whether hospitals and health systems and other nonprofit organizations are complying with the rules for tax-exempt organizations.

 

All tax-exempt healthcare organizations are required to file Form 990 to provide an overview of their activities, policies, and the community benefits they provide. “For most organizations, the form is open to public inspection, so the optics of the disclosures are as important as filing complete and accurate returns with the IRS,” said Mary Torretta, Grant Thornton National Healthcare Tax Leader.

 

Forms 990 are often voluminous documents with a dense amount of detailed information, so reviewing them can be a time-consuming and overwhelming task. While reviewing each line item may not be practical, it is important to carefully review some of the most sensitive sections of the form, especially because all the information it includes can be easily accessed by the public and the media. There are three major hotspots in the form that bear additional focus and scrutiny—Schedule J (executive compensation), Schedule H (community benefit story), and Schedule L (conflicts of interest).

 

Focus #1: Compensation and other troublesome topics (Schedule J, Part VII)

Schedule J is used for disclosing details about compensation paid to IRS-specified individuals such as “certain officers, directors, individual trustees, key employees, and highest compensated employees.” Reporting requirements also include disclosure of the process the organization follows in determining executive compensation and benefits. 

 

“The individuals included in these compensation reports can include a long list of people,” said Torretta. “With big entities, it’s often a ‘who’s who’ of the organization, whereas with smaller entities, it may be lesser-known individuals.”

 

Key areas of Schedule J that should be reviewed carefully are:

  • Severances. For individuals that trigger a return disclosure, Hospitals must disclose severance payments made upon a person’s unvoluntary or voluntary separation from service. Sometimes this involves substantial payments (for example over two years of compensation continuation) that are outlined as part of their original employment contact or as part of a negotiated departure from the organization. In these cases, additional disclosures, including the individuals’ name, terms and conditions of the arrangement and payment amounts are required. “This can get tricky, because of the potential for legal repercussions, the sensitivity of the information, and confidentiality issues,” Torretta said. “It is always our advice to pay special attention to severance agreements and severance clauses in employment contacts as they are drafted as well as when they are reported on the 990.” 
  • Deferred compensation. Scenarios in which compensation payments are made long after an individual has left the organization can create headaches. Because deferred compensation must be reported both in the year earned and the year paid, the way in which accruals present on the 990 can often create the perception that an individual’s compensation is greater than it actually was. Sometimes the cash payments are reported on the Form 990 after the individual has stopped working for the organization, which create questions for the reader. “The timing can be very important and present an optics issue,” Torretta said. “So, it’s important to be aware of those deferred compensation plans in place for key executives and how they appear when they are accrued for and ultimately paid out.” 
  • Bonuses. Organizations are required to report on bonus and incentive compensation paid. “It’s important to pay close attention to physician bonuses, because many are paid based on “Relative Value Units” (RVUs), so their bonuses can often end up being huge numbers,” Torretta added. “It’s important to be aware that your doctors are looking at this information and comparing themselves to other doctors, so you can expect a lot of questions about it. We recommend adding some clarifying information about how the board or management is involved in setting incentive goals.” 

Focus #2: Telling your community benefits story (Schedule H)

Schedule H is the “meat and potatoes” of how your hospital demonstrates its tax-exempt status. It provides quantitative and qualitative information about your hospital’s financial assistance policies, community benefit assessment and reporting, and community health needs to demonstrate your accountability to the communities you serve.

 

Recently, Schedule H came under scrutiny at Congressional hearings, where the U.S. Government Accountability Office (GAO) reported that the qualitative reporting format of the schedule has resulted in inconsistencies in what hospitals are reporting. Studies by the Kaiser Family Foundation also found that the value of charity care varies from 0.1% of operating expenses for some hospitals to 7% or more for other hospitals. The House ways and Means Committee concluded that this wide variation is a result of “the lack of clear guidelines from Congress and the IRS about what constitutes a community benefit.”

 

At the hearing, the GAO leadership presented recommendations for revamping Schedule H so that hospitals can provide a clearer explanation of their charitable activities. Because of the scrutiny into Schedule H, the two areas that should be reviewed carefully are: 

  • Your annual community benefit costs. The schedule includes the costs that tax-exempt hospitals incurs in providing community benefits as a percent of hospital expenses. “When reviewing this schedule, our recommendation is to use a compare-and-contrast method,” said Erin Couture, Grant Thornton Managing Director, Healthcare Tax. “More than understanding the numbers, it’s important to know how they compare against prior years and against your peers. It’s also important to know the ‘why’ of your numbers, so that, if you see a drop in financial assistance, you understand and can provide context to the reader.” 
  • Narratives that tell your hospital’s story. Because your financial numbers do not give the whole measure of the value of the benefits provided by your hospital, it is important to go beyond the financial information and provide detailed descriptions of your community benefit programs. The IRS asks hospitals to provide narrative descriptions of any additional information that is important for an understanding of the full scope of community benefits they provide for their communities. 

“This is a critical component of Form 990 reporting, and it is important that you tell your hospital’s story,” says Couture. “To ensure that you provide a complete and effective narrative, we recommend that you get your system’s community benefit team involved and rely on your external advisors to ensure that you are telling your hospital’s story as completely and accurately as possible.”

 

For more insights and recommendations from Grant Thornton about Schedule H, see “How healthcare tells its community benefit story.”

 

Focus #3: Conflicts of interest (Schedule L)

Schedule L requires the disclosure of business dealings the hospital or health system has with what the IRS refers to as “disqualified persons or other interested persons.” This is a section of the form that undergoes high-level scrutiny by the IRS and other readers, so it is important to be clear about: 

  • Who is subject to disclosure. Conflict disclosures may include officers and trustees, key employees (including physicians). The term “interested person” has a different meaning in each section of the Schedule L and it is important to ensure that you have all the relevant information for each factual scenario and to make sure that there are no omissions or duplications on your Schedule L. 
  • What should be disclosed. “There’s a difference between what constitutes a conflict for the organization and a conflict for the 990,” said Torretta. For example, hospitals are required to report on business transactions with entities that are 35% or more controlled by an “interested person”, often physicians who are on the board or employed, but may participate in a private physician practice. While this type of transaction is allowed, it still must be disclosed. “Conflicts that are reported on the 990 are not transactions that aren’t allowed, often they provide benefit to the organization because of the relationship between the parties.  It is important however that each transaction is disclosed as failure of disclosure is often the basis for critical feedback from the media and other constituencies.

Other potential issues

 

There are other important sections of Form 990 that may require special attention. These can include sticky donor issues. For example, how do you maintain the anonymity of donors who want to keep their donation private? In recent years, the IRS has also focused on foreign filings and activities of hospitals and health systems reported on Schedule F.

 

With the many transactions it covers, Form 990 can raise issues for your hospital with your staff, your community, and the media. To make sure that there are no surprises when it is time to file, you should work with an experienced outside consultant that can help you spot those issues and resolve them before they create a problem. And, should an issue arise, you should have a public relations plan in place so that you can deal with it effectively and contain the consequences.

 
 

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